How does a business credit card work?


What is a Business Credit Card?

If you’re a SME owner, business credit card can be a convenient way to increase your company’s purchasing power.

How a Business Credit Card Works

A business credit card can be a convenient way to quickly access financing for short-term needs and increase your company’s purchasing power. It is often marketed as an attractive alternative to a traditional line of credit. Unlike any source of financing, Karbon business credit card is free to use.

Without a good system in place, it can be difficult to keep track of—and keep a handle on—business credit card spending, which ultimately affects your bottom line. Certain strategies can be utilized to ensure good credit card practices. 

Ensuring Accountability

“The most important step a small business can take to make sure credit cards are used effectively is to set up a bomb-proof accountability system,” says Sandeep Agarwal, founding partner of Moonshadow Leadership Solutions in Bangalore, Karnataka. “This could mean everything from preapproval of all business credit card spending to rigorous requiring of receipts to pulling credit cards from those who do not report completely and on time with receipts,” says Sandeep. Have a system in place before the first business credit card arrives and, Sandeep says, be consistent, rigorous, and fair while tolerating no exceptions. 

Deciding Who Receives a Card

Sandeep acknowledges the challenges employers may face in deciding who gets a business credit card. “I’ve seen businesses that lost control of credit card spending by issuing too many cards to too many people and thinking that all important officers and travelers needed the convenience of a company credit card,” says Sandeep. While giving everyone a business credit card might seem like the right or easy thing to do, it can lead to a “dysfunctional, expensive system and a serious lack of control and accountability,” he explains.

Use alternatives and establish rules. “Many companies, especially with salespeople, reimburse for company spending on personal credit cards with excellent accountability—i.e., no receipt, no reimbursement,” says Sandeep. It is helpful, however, to have clear rules regarding who gets a business credit card, whether it’s based on seniority, position, or other factors. This can help avoid confusion and mitigate bad feelings from employees who would like a card but are not eligible.

Setting Credit Card Limits

Every business should have clear policies about spending, including which expenses can be put on business credit cards, how much employees can spend, and how often they can use their cards. It’s important to put the policy in writing and have every employee who is issued a business credit card read and sign it. After they do, give each cardholder a copy to use for reference.

Depending on the business credit card, you may be able to set up restrictions that limit transactions to a certain dollar amount, spending category, and even certain days and times. With some business credit cards you can set up individual restrictions for each employee. For example, you may limit one employee to INR 500 a day any day of the week for gas purchases, while limiting another to INR 1000 for gas and INR 500 for meals each day, but only on business days.

Being Watchful of Card Activity

Many business credit cards allow you to set up activity alerts that arrive as text or email messages. The alerts can be set up to notify you each time a transaction takes place or only if an employee uses (or tries to use) a card in an unapproved manner. You can also take advantage of Karbon’s tool. Your accounting department should review each statement to make sure each line item is a charge you authorized.

Business Credit Card Benefits

Along with providing the necessary cash flow to help maintain and build your business, credit cards can offer these advantages:

  • Easier Qualification—It can be easier for business owners who do not have a well-established credit history to qualify for a revolving line of credit with a business credit card, especially if it’s secured, rather than a traditional line of credit or bank loan
  • Convenience—Business Credit cards are the ultimate in financing convenience. Business owners can access funds for purchases or cash withdrawal much more quickly and easily than having to find cash and/or use a checkbook.
  • Financial Cushion—A business credit card can provide business owners with a much-needed financial cushion when accounts receivables are behind or sales are slow and the business is short on cash.
  • Online Ease—Increasingly, business owners make purchases and do business online with vendors, contractors, and suppliers. Using a business credit card makes online transactions easier.
  • Bookkeeping Assistance—In addition to receiving a monthly statement, most cards provide small business card holders with online record-keeping tools to manage their accounts, including a year-end account summary, which can help a bookkeeper track, categorize, and manage expenses. It can simplify bookkeeping, help when using outside professionals to navigate an audit and pay taxes, and provide an easy way to monitor employee spending.

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